Buffett Tax On Rich Will Hurt Average Americans

Warren Buffett is interviewed at the White House on July 18, 2011, following his meeting with President Obama. AP View Enlarged Image

Billionaire Warren Buffett, always popular among Democratic redistributionists, says he wants a "minimum tax" on the very rich.

Never mind that we already have one, and that what he proposes would hurt both the economy and the middle class.

The third richest man on Earth has endeared himself to the far left by calling for punitive taxes on those with wealth.

Writing in the New York Times, he has proposed a minimum tax of 30% on incomes of $1 million to $10 million and 35% on incomes above that. Hey, these people are rich — so who cares?

Well, you should. Because Buffett's proposed tax hike is just another way of removing investment capital — the engine of economic growth — from the U.S. economy. It would also do next to nothing to close our long-term budget deficits, now running at $1 trillion plus a year.

Last year, according to the Treasury Department, the U.S. deficit was $1.1 trillion. According to a study by Congress' Joint Committee on Taxation, a Buffett-style 30% tax on all millionaires would generate just $5 billion.

That's less than one-half of one percent of our budget. In short, Buffett's proposal is a fiscal joke.

Buffett and others have said tax hikes on the rich are "fair." The top 1% earn about 16% of all income in the U.S. But they pay 37% of all the federal income taxes. Is that fair? If so, would making millionaires pay even more be fairer still?

Consider this: The 400 richest Americans pay about as much in taxes as the bottom 50% — about 72 million Americans — do.

As a group, millionaires have an effective income-tax rate — that is, what they actually pay — of 24%. For the rest of us, it's 11%.

As for Buffett's idea for a "minimum" tax on the rich, the U.S. already has one. It's called the Alternative Minimum Tax (AMT).

It was put in place in 1969, after it was revealed that 155 people with incomes over $200,000 had paid zero in income taxes in 1967. It was meant to catch a handful of rich folks who were not paying their "fair share."

Well, next year, thanks to bracket creep, the AMT will snare as many as 20 million middle-class Americans. Is that fair?

No, but that's how "tax the rich" works. Raise taxes on the rich first, then extend them to everyone else later, including the middle class.

This has been tried before. As economist Alan Reynolds of the American Enterprise Institute pointed out in IBD, the 1990 Omnibus Budget Reconciliation Act raised taxes on the rich to make things more "fair" and to boost revenues to reduce the deficit.

How did that work out?

In 1989, tax revenues as a share of GDP totaled about 8.3%. By 1992, after the tax hikes kicked in, they dropped to 7.6%.

Similar foolish experiments in raising taxes on the rich were tried in 1932 and in 1937. Both times, tax revenues plunged as the economy tanked.

You'd think such clear lessons would be heeded. But they're not.

In his proposal, Buffett jokes, "Let's forget about the rich and ultrarich going on strike and stuffing their ample funds under their mattresses if — gasp — capital gains rates and ordinary income rates are increased."

Really? History conclusively shows Buffett is wrong. But never let facts get between a rich man and his opinions.

In 1986, as part of that year's tax reform, capital gains taxes were raised sharply.

In that year, before the rate hike went into effect, total capital gains hit a then-record high of $327.7 billion. But four years later, after the higher rates hit, capital gains realizations had plunged 62%, to $123.8 billion.

In contrast, as part of a budget deal in 1996, Republicans got President Clinton to accept an eight-percentage point cut in capital gains tax rates.

That year, total capital gains in the U.S. stood at about $260.7 billion. By 2000, after lower rates took hold, cap-gains income surged 147% to $644.3 billion.

This isn't just a numbers game.

Every dollar in capital gains lost to the economy is a loss for business investment, productivity and worker income.

And since more than half of all Americans have 401(k)s or some other retirement vehicle that depends on capital gains, it's a loss for them as well.

"An economy constrained by high tax rates will never produce enough revenue to balance the budget, just as it will never create enough jobs or profits."

So what crazed supply-sider did the GOP get to say that? Whoever he is, he's clearly way out of step with today's Democrats, and probably a member of the far right. Right?

Well, actually, it was JFK, a Democratic president, who said it, uttering what most people seemed to understand then but don't today — raise taxes, but only at your own economic peril.

See Also

Politics: The White House has denounced an anti-abortion group's videos of Planned Parenthood's activities as "fraudulent" and circled its wagons to defend the indefensible. What kind of White House is this?For an institution that might argue that it doesn't have a dog in this fight, the White ...

Iran Deal: After initially refusing, the United Nations' International Atomic Energy Agency will brief senators Wednesday. Are its nuclear monitoring practices kept secret because they're inadequate?Yukiya Amano, the director general of the IAEA, until Friday was refusing to brief senators on ...

Corruption: The third installment of released emails fell hard Friday on the Hillary Clinton campaign. If her candidacy lasts until the end of the summer, there's much more wrong with this country than we thought.Friday had to be an extraordinarily trying day for the Democratic front-runner. On the ...

Regulation: As businesses struggle to stay open and lay off workers, the Environmental Protection Agency is preparing one of the biggest hiring binges in America outside of Google. Good news? Hardly.Barack Obama's EPA has announced it will try to hire 800 new regulators over the next several ...

Taxes Vs. Prosperity: The Real Wedge Issue Ronald Reagan died 11 years ago, and his presidency ended a quarter century ago. But my, how his tax-cutting ideas live on. The living legacy of Reaganomics, or supply-side economics, is that tax rates keep falling all over the world. Imitation really is ...

About Investor's Business Daily

Investor’s Business Daily provides exclusive stock lists, investing data, stock market research, education and the latest financial and business news to help investors make more money in the stock market. All of IBD’s products and features are based on the CAN SLIM® Investing System developed by IBD’s Founder William J. O’Neil, who identified the seven common characteristics that winning stocks display before making huge price gains. Each letter of CAN SLIM represents one of those traits.

Select market data is provided by Interactive Data Corp. Real Time Services. Price and Volume data is delayed 20 minutes unless otherwise noted, is believed accurate but is not warranted or guaranteed by Interactive Data Corp. Real Time Services and is subject to Interactive Data Corp. Real Time Services terms. All times are Eastern United States. *Reflects real-time index prices.